Guffaws and Greenbacks: Where The Action Is on Financial Reform

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Politico’s story on Republican legislation to roll back slivers of the Dodd-Frank financial reform law has gotten a little more attention than I expected. I’m not entirely sure why, considering that the Senate won’t pass these measures and the President wouldn’t sign them. The argument for paying mind laid out by Jon Chait is that the law’s opponents have come in the cover of darkness to snatch substantial reform away:

Opponents of the bill are operating in an environment where almost nobody other than the financial industry is paying attention. That’s an environment where it’s easy to, at the least, starve financial reform to death. But if President Obama raises the profile of the issue, the politics will quickly flip.

Chait gets two elements of this half-right — interested parties are paying close attention and funding is in play — but one has little to do with the financial industry and the other one has nothing to do with Republicans’ latest legislative machinations. First, the easy one: what is actually happening in Congress.

With no chance of immediate legislative repeal, the would-be plot to get at the soft belly of financial reform has everything to do with budgets. But here’s the thing: You can’t starve the beast to death because most financial regulators feed themselves. The Fed isn’t subject to the appropriations process and neither is the Consumer Finance Protection Bureau, which falls under the Fed’s umbrella. (Republicans have proposed a bill that would drag the CFPB back toward congressional funding, but, again, that sort of thing is not going anywhere past the House.) Other regulators pay their own way too, like the FDIC does with insurance premiums. The notable exceptions to this are the SEC and CFTC, and yes, Republicans are going after some of their funding in the current budget debate. (Incidentally, one of the casualties of the Dodd-Frank conference committee process was a measure that would have allowed the SEC to pay for its own budget out of the fees and fines it levies on Wall Street.) So Republicans can “chip away” legislatively all they like and Democrats could accuse them of trying to repeal the whole thing and all that really matters is a targeted budget issue.

The other FinReg front is the rule-writing process still going on at various federal agencies — laws passed by Congress are really just vague directions that real government types have to fill out later — and, yes, the banks are working the refs really hard on that one. But consumer activists are paying attention too! They’re reading so closely into banks’ every move that they’re convinced higher ATM fees are a plot to turn the tide of public opinion against the law. (Higher fees for basic services at banks like ATMs and checking accounts were more-or-less created by Dodd-Frank, because the law seriously curtails revenue streams like interchange fees — let’s not go down that road — and banks have to replace that with something.) Elizabeth Warren is also touring the country trying to sell bankers of all stripes on her nascent consumer bureau.

Back to the financial industry. There is real tension in the rule wrangling, and nowhere was that  more apparent than at FDIC chairwoman Sheila Bair’s speech to the American Bankers Association on Wednesday, when parts of her address were greeted with audible groans and guffaws from the crowd. What rhetorical transgressions caused such a reception? Reuters:

She said Dodd-Frank was good for community banks because, among other things, it drives down small banks’ deposit insurance costs, while hammering larger firms with more restrictions.

“Is there ever times when you can acknowledge what regulators have done to help the stability of the industry? What the FDIC has done? What, frankly, Dodd-Frank did? I think there needs to be some acknowledgment of that,” Bair said.

The ABA represents banks of all sizes, but its conferences tend to largely draw executives from smaller banks.

Bair tried to persuade the audience that Dodd-Frank is almost completely targeted at large banks.

Groans followed.

The ABA, which represents small and large banks alike, doesn’t like many aspects law and, of course, is pleading its case. In this instance, Bair politely told them to cram it and suggested that maybe they should try to focus on the upside. Smaller banks you say? Under Dodd-Frank, the FDIC’s main new power is to seize and orderly liquidate very large, complex firms that are at risk of going under. This “resolution authority” is much like the bankruptcy process for smaller banks. There’s no doubt that small banks, along with just about everyone else in the world, suffer when systemically important megabanks crash and burn. Let’s also consider that all FDIC-insured banks, small and large, pay premiums into the same pool. Dodd-Frank calls for a tweak to the formula by which the FDIC calculates those premiums. Instead of just charging based on deposits, the FDIC will take into account total assets and liabilities when determining a base rate. That will mean higher premiums for larger complex banks, but it looks like it should shift some burden off smaller community banks. And that’s the crux of Bair’s argument in this particular case. Now ABA members still have plenty of issues with the law, decry onerous regulation and might sometimes act like Bair and Warren are Scylla and Charybdis. But it’s worth noting that the ABA is not in favor of whole-cloth repeal, and banks aren’t monolithic on each issue. The Independent Community Bankers Association quite likes the new premium formula; they lobbied for it.

So you wanted to know where the action is on financial reform? (Having read this far, you surely regret it now.) CliffsNotes: Not in partial repeal bills.